Uranium price will rebound: analysts (Part 6)

GMP Securities analysts David Wargo and Krystal Nagel believe that prices will rise to US$60 per lb. uranium oxide, because this is the minimum price required to ensure adequate mine supply, allowing marginal miners to operate at an internal rate of return (IRR) of 15%.

The GMP analysts say that prices will not return to the high levels (US$136 per lb. uranium oxide) seen in 2007, which were driven by speculators. Despite this, Wargo and Nagel are bullish, saying: “Current market turmoil has presented a unique opportunity to invest in the uranium sector as equity valuations have returned to levels not seen since the early days of the uranium cycle.”

The GMP analysts add: “We believe that the ‘nuclear renaissance’ has significant global traction and will continue as reactor builds, primarily in China, India, Russia and Western Europe, will require growth across the entire fuel cycle.”

They conclude: “We believe that the uranium industry as a whole is in its strongest position ever for long-term growth. However, we believe that this growth will be at a much more measured pace from a uranium price and equity valuation perspective than has been the case over the last three years.”

The GMP analysts attribute the steep drop in the uranium price to utilities ceasing their spot market purchases, while hedge funds and other investors dumped metal on the market as the credit crisis developed. They estimate that as much as 15 million lbs. of uranium oxide has now been sold by speculators, leaving only two investors holding uranium inventories: Uranium Participation (U-T) and Nufcor. The two companies are unlikely to sell the metal in the short term, setting the stage for a uranium price rebound.

Among uranium stocks rated a “buy” by the GMP analysts are Cameco (CCO-T, CCJ-N) with a $25.60 price target, Bannerman Resources (BAN-T) with a $0.40 target, Denison Mines (DML-T, DNN-X) with a $4 target, Laramide Resources (LAM-T) with a $2.40 target, Paladin Energy (PDN-T) with a $4 target, Uranium One (UUU-T) with a $3 target, and Uranium Participation (U-T) with a $9.20 price target.